Recently in Asia Category

The economic impact from Japan's crisis is beginning to be felt across the globe. Supply chain disruptions in the automotive and electronics sectors will take a bite out of chemical company profits in North America and Europe.

One component in the supply chain can have a significant impact. For example, a shortage of engine-related micro control units (MCU) resulting from damage to Japan's Renesas Electronics plant in Naka will curtail global auto production, according to Deutsche Bank.

The Renesas plant, the most advanced of its kind, supplies between 18-20% of the world's automotive MCU market, its analysts estimate. About 70% of production is sold to Japanese automakers, with the remaining 30% to US and European car companies. And the supply of these MCUs is not easily replacable, as boosting production at other sites could take as long as 6-9 months.

Deutsche Bank estimates that 12% of US "Big Three" (General Motors, Ford, Chrysler) auto production is impacted by the MCU disruption. In a worst-case scenario, global forecasted auto production of around 76m units would be reduced by 7.5m-11m units, or 10-14%.

"As a result, we see downside risk to US chemicals earnings starting in Q1 for companies with exposure to the global auto makers," says Deutsche Bank chemicals analyst David Begleiter. US chemical firms under coverage with the greatest exposure to the auto end-market include Solutia (18% of sales to auto OEMs), Rockwood (14%), Celanese (11%), PPG Industries (10%), Cabot (15%), Dow Chemical (8%), and DuPont (7%).

The civil war in Libya is also impacting the chemical supply chain - and not just indirectly through the higher price of crude oil.

Lawrence Sloan, president of the Society of Chemical Manufacturers and Affiliates (SOCMA), noted that some of SOCMA's member companies have European customers that have lost business in Libya and other African nations due to popular uprisings. The loss of business will work its way through the supply chain, he said at the GlobalChem regulatory conference in Baltimore, Maryland, US last week.

While supply disruptions stemming from Japan and Libya will certainly hit profitability across many business sectors and regions, the impact is likely to be transitory. If the global economy can withstand and overcome these external shocks, we'll be off to the races.

The unimaginable tragedy that struck Japan in the form of the record-magnitude earthquake and tsunami, compounded by the ongoing nuclear crisis, presents one of the greatest challenges ever for the nation. The images of the destruction and impact it is having on the people are heartbreaking, and we hope the country will recover soon and strongly.

The massive hit to the world's third-largest economy and chemical producer has two major near-term impacts: one on demand and the other on production.

DEMAND-SIDE IMPACT
All of Japan's automakers halted most production lines in the country and there have been numerous disruptions to manufacturing, from automotive to energy. This is already sapping demand. Crude oil prices plunged early last week, along with naphtha - a critical feedstock to Japan's petrochemical sector.

Confidence in the local economy was not at a high point before the tragedy, and this will only ebb further in the near term as caution reigns.

The demand destruction will have a far-reaching impact worldwide. Laurence Alexander, chemicals analyst at global investment bank Jefferies & Co., notes that in the near term, "a shock to Asian demand could also undercut North American [chemical] exports and, indirectly, margins." Companies and analysts will be assessing the Japan impact for weeks to come.

At an investor conference hosted by global financial institution Susquehanna International Group in Boston, Massachusetts, US on March 15, "high oil prices and Japan failed to dent chemical company economic and earnings outlooks," according to Susquehanna chemical analyst Don Carson. "While equity and commodity markets have traded off with the natural disaster in Japan and volatile oil prices due to political turmoil in the Middle East, managements continued to be cautiously optimistic on the economic outlook."

However, this could quickly change, depending on the nuclear situation.

SUPPLY-SIDE IMPACT
The impact on the chemical supply-side is more obvious. A number of crackers are down or operating at reduced rates, causing supply disruptions down the chain. The near-term impact has been spiking prices.

Asia paraxylene (PX) prices hit a record high following a force majeure by JX Nippon Oil, Japan's largest exporter of PX. Asia caprolactam prices have also spiked on panic buying from Taiwan's nylon producers.

But the forces of supply shortages and demand destruction will collide - and it remains to be seen how it will all play out. In the short term, styrene butadiene rubber (SBR) prices are expected to fall as Japan's auto production is stymied.

Much on the overall supply and demand situation will depend on how and if the nuclear situation can be controlled. A major nuclear catastrophe on top of the existing devastation would have dire consequences worldwide, not the least on sentiment.

RECONSTRUCTION PHASE
But once this plays out, Japan can proceed on to the next phase - reconstruction. The resilience of the Japanese people in the face of this tragedy is admirable. There is no doubt that the nation has the full capability to recover, given the proper support and resources.

Japan may one day emerge from this with a revived economy, jump-started by looser monetary policy and huge reconstruction efforts. Its central bank has already injected 28 trillion yen ($350bn, €253bn) into the financial system in several steps.

In reconstructing the energy and chemical sectors, tough decisions will have to be made. In a likely move away from nuclear power, Japan will need much more oil, natural gas and coal for its energy needs, along with any alternative energy solutions.

In the chemical sector, Japan's naphtha crackers have become increasingly uncompetitive in the global context with their relatively small size and lack of advantaged feedstock.

Consolidation of certain crackers has been planned for years and some progress was being made, but it has been painfully slow. Here the industry will have a chance to reevaluate its long-term position.

The BP oil spill in the US Gulf will have major implications for the US chemical market. Yes, the chemical industry is not the oil industry, but they are inextricably linked - not just in terms of feedstocks, but also how they are perceived in the minds of the general public.

The direct impact of the spill on the chemical industry will be the restriction of oil and natural gas feedstock and energy supplies stemming from the moratorium on new offshore drilling and other potential policies.

But the indirect impact has far more potential for damage. As one astute executive at the American Chemistry Council (ACC) annual meeting in Colorado Springs in mid-June pointed out, the BP disaster highlights the inherent risks of all operations and puts into play the precautionary principle - where the burden of proof that something is not harmful is put on the producer/operator.

This could impact US chemicals management policy, and the ACC is rightly concerned (see story on page 17).

"A global, high-profile industry has lost the trust of key stakeholders, and I suspect that many industries have been tarnished in the process," said Brian Ferguson, executive chairman of US-based Eastman Chemical and chairman of the ACC. "American institutions face a crisis of trust, and the chemical industry and our products remain at the front, or near the front of the line."

On a positive note, the buzz from CEOs and other senior executives at the meeting was that sales and earnings are holding up well so far, even in the face of the European debt crisis and worries over a potential slowdown in China.

Coming off a robust first quarter, where profits of many global chemical companies swung ever closer to prerecession levels, there was no talk of a loss in momentum. Sales in Europe are holding steady, while strong growth continues in Asia and Latin America. There are also pockets of strength in the US, such as in the automotive and electronics markets.

While the unemployment rate remains stubbornly high in the US at 9.7%, those that have jobs are feeling more confident that they will continue to be employed, and are loosening up the purse strings, according to some executives.

Although the world is more connected than ever and the decoupling argument was smashed in the global recession of 2008-2009, the CEO of one of the largest global chemical companies expressed optimism that this time, it truly is different - that the European crisis will ultimately be contained.

 

Photo credit: Time

Few have been hit harder by the global financial and economic crisis than Japan. Its export-based economy heavily exposed to automotive and electronic goods came under severe pressure and challenges persist.

However, this economic tsunami will put a charge into the pace of structural reform - it is already happening in Japan's chemical industry with massive restructuring involving plant shutdowns, and a flurry of joint ventures and alliances.

Mergers and acquisitions, while likely to continue on a limited scale, are not the answer to the Japanese chemical industry's structural issues. Rather Japan is ready to begin a new era of strategic alliances to access feedstocks and leverage technologies.

Japanese chemical M&A activity has slowed considerably in recent years, with 10 deals over $25m in size involving a Japanese buyer or seller completed in 2006, four in 2008 and one in the first half of 2009, according to New York-based investment bank Young & Partners.

However, joint ventures and alliances are picking up. In August, Mitsubishi Rayon signed a $1bn JV deal with Saudi Arabia's SABIC to produce methyl methacrylate (MMA) and polymethyl methacrylate (PMMA) in Saudi Arabia for the automotive and electronics industries.

Mitsubishi Rayon also in September formed an alliance with US-based Cytec industries to develop carbon fiber composites for the next generation of aircraft.

But there could be some interesting M&A deals to come. Mitsubishi Rayon, which completed its $1.6bn acquisition of UK-based MMA producer Lucite International, may itself be the target of an acquirer. Rumors abounded this past summer that the company was in talks to be acquired by Japan's chemical leader Mitsubishi Chemical for up to $2bn.

With all the exciting changes in this industry, we are delighted to present the October 26 special issue of ICIS Chemical Business with our esteemed partner, The Chemical Daily, of Japan, whose editors provide invaluable insight into this market.

 

Photo credit: Syntagma Media

Many across the global chemical industry are pinning their hopes on China as a driver for recovery in demand for chemicals. Indeed, in recent months, we have been encouraged by some startlingly good import and export figures from the country.
High-density polyethylene (HDPE) imports nearly doubled in the first half of the year, while low and linear low density polyethylene (LDPE and LLDPE) jumped by around a half. Domestic chemical demand also appears to have rocketed.
This week, we analyze the causes of this apparent recovery and ask if it signifies a real turnaround.
Realizing that export markets were collapsing, the Chinese government has put in place enormous stimulus plans. The automotive programs, for example, resulted in sales of locally made cars rocketing 36% year on year in June. Huge amounts of cheap credit have also fueled growth. The question remains, though - how strong is real, underlying domestic demand?
China is pushing hard into specialties as it tries to diversify its economy. This will provide raw materials for products to satisfy the nation's burgeoning middle class. The figures are startling: between 2005 and 2020, China will add around 500m consumers who have an annual income of at least $10,000 (€6,800). That market is an opportunity not to be missed.

Nowhere is the global tectonic shift in chemical manufacturing more apparent than in the largest chemical company's latest restructuring and expansion moves.

Germany's BASF, which acquired Swiss specialty chemical giant Ciba for $5.1bn in April, laid out its massive restructuring plan last week. The bottom line - 23 out of 55 acquired production sites will be closed or sold, while the remaining sites will be "optimized" or restructured.

About 3,700 jobs will be cut, and the company will aim to achieve annual cost synergies of €400m by 2012.

The former Ciba sites are concentrated in Switzerland and elsewhere in Europe, with some plants in North America and Asia.

But also last week, BASF announced that the Chinese government has given the go-ahead for the company's $1.4bn expansion of its BASF-YPC joint venture site in Nanjing with state-operated energy and chemicals firm Sinopec.

The investment includes an expansion of the existing steam cracker and three existing plants, and the construction of 10 new chemical plants. The expansion will produce specialty chemicals for the Chinese market in areas such as construction, electronics, pharmaceutical, automotive and chemical manufacturing.

The trend reflects some of feedback from our very first ICIS Chemical Business US Advisory Board meeting held in New York on June 30.

Comprised of industry senior executives and analysts, the group took note of our weekly New Projects section listing all the projects announced for a week - in particular, how few were in North America and Europe.

Among the 12 new projects announced for the seven days of June 16-22, five were in Asia and two in the Middle East. Five were in Europe and the US, but among that latter group, two were storage facilities.

One week does not a trend make, but we suspect that new project announcements in Asia, the Middle East and Latin America well outpace those in the traditional manufacturing bases of the US and Western Europe.

But new projects only tell part of the story. The board indicated that they would also like to see a list of plant shutdowns and where these were taking place as well. We hear you - please stay tuned!

 

Photo credit: Ciba

CHINA'S $10bn deal with Brazil to lock up significant oil supplies from its energy firm and join in exploration, refining and petrochemical ventures, heralds a new age of cooperation between the two countries.

Under a 10-year deal, China Development Bank is giving a $10bn credit line to Brazilian energy giant Petrobras in return for the company sending an average of 150,000 bbls/day of oil to China in 2009 and 200,000 bbls/day from 2010. Petrobras needs the money to develop its huge reserves and China needs the oil.

China's energy major Sinopec and Petrobras are now discussing joint projects in refining, petrochemicals as well as exploration, said Petrobras CEO Jose Sergio Gabrielli de Azevedo at a press conference at the New York Stock Exchange.

The deals are part of a broader economic partnership between Brazil and China, which plan to put forth a joint action plan for 2010-2014. In April, China overtook the US as Brazil's largest trading partner for the first time.

But why not view this deal as a model for the US and other oil importing countries to secure supplies from abroad? Petrobras says it's financing needs are now all taken care of, with $30bn in funds raised this year, but there are always other opportunities.

China is aggressively locking up oil and other natural resources through deals and acquisitions. It's a race out there to secure increasingly limited resources.

With oil output in the next several years projected to decline sharply in Mexico, the second-largest oil exporter to the US at around 1.2m bbls/day, the US must seek additional supplies.

While the US is ploughing billions of dollars to develop its own energy resources, direct government lending to help develop much needed foreign oil supplies might not be a bad investment as well.

(Photo credit: Xinhua/Rao Aimin)

ASIA HAS roared back with a strong rebound in petrochemical and plastics prices. High hopes are being pinned on the region, and especially China, to lead the global economic recovery.

But as pointed out by James McIlvenny, senior vice president of Dow Chemical's performance products division, China, which represents 2-3% of global GDP, is not in and of itself large enough to drive "real growth."

McIlvenny gave a keynote speech at the Asia Petrochemical Industry Conference (APIC) in Seoul, South Korea, where the mood was cautious. While the recent price surge has given producers a nice window of solid profit margins, that window is likely to be shut.

Driven up by restocking, some demand recovery and as well as speculation, prices have risen on the order of 50% from their late 2008 lows. But many companies should view this period of strong prices not as a return to the good ol' days, but as an opportunity to restructure and reposition for the future.

New and low-cost commodity chemical production capacity is on its way from the Middle East and China, and there is still too much capacity out there.

Players in the mature economies of Asia as well as the US and Europe will have to shut down high-cost plants to compete in the new reality. And they must seek to move further downstream into specialties through an enhanced focus on innovation.

No doubt we are entering a period of unprecedented heightened global competition. But we must take into account the lessons of the past and not hinder trade between countries.

This was a major concern at APIC - that countries with an eye towards protecting their struggling domestic economies would put up increasing barriers to trade.

Korea Petrochemical Industry Association chairman Won-Joon Hur, cited the "all-out protectionism back in the Great Depression of the 1930s (that) eventually led to the delay in the economic recovery."

Indeed, let's not make it harder on ourselves and let free trade flow where it may.